Cost of College Continues to Skyrocket While Policymakers Seek Solutions

The cost of higher education has far outpaced state funding, household incomes and inflation. Now, the president has put the issue back on the policy radar.

President Barack Obama speaks at Henninger High School in Syracuse, N.Y., Thursday, Aug. 22, 2013, on the first day of a two day bus tour where he is speaking about college financial aid. (AP Photo/Jacquelyn Martin) AP

Americans pursuing higher education to bolster their resumes have found that a college degree comes at a steadily rising price.

The new release of the College Board’s annual report on college pricing brought good news: tuition and other expenses recorded the smallest annual increase in decades this academic year. But over the longer term, costs have escalated to levels that make attending college more expensive than ever for today’s students. In only 10 years, inflation-adjusted net costs of public university tuition, room and board (after grants and tax benefits) climbed a staggering 34 percent, according to the College Board.

At the same time, funding from state and local governments continues to fall. And to make matters worse, families don’t have any more money to pay for higher education as median household incomes have mostly remained flat or slightly declined in recent years.

So it’s no surprise that the issue has made its way back onto policymakers’ radar. President Obama embarked on a bus tour earlier this fall pitching a plan to curb college costs that includes a ratings system assessing the value each school provides.

The primary driver of the hike in costs for public institutions is a sharp drop in state funding. State and local government appropriations stood at about $5,900 per student in fiscal year 2012 – a 26 percent decline in inflation-adjusted dollars from 2000 levels, according to data compiled by the State Higher Education Executive Officers Association. This cut has occurred nearly across the board: over the past five fiscal years, every state – with the exception of North Dakota and Illinois – recorded declines in per student educational appropriations.

Part of this is because higher education often takes a backseat to other spending. Ronald Ehrenberg, director of Cornell University's Higher Education Research Institute, said states don’t have much incentive to increase funding as other programs receiving federal assistance.

Those with college degrees enjoy a huge advantage in the workforce, a fact not lost in the policy debate. “There is less of a sense of the social role of higher education, and more of a sense that the individuals who are going to benefit should be the ones who pay for it,” Ehrenberg said.

While higher education money is drying up, elementary and secondary education funding per pupil has grown, at least nationally. Ehrenberg attributes this to the notion that state legislators controlling the purse strings all benefit from K-12 funding, while only a select few represent districts with colleges and universities.

Much of the policy discussion and media coverage around the issue has fixated on tuition costs. But room and board expenses, too, are becoming more costly. Inflation-adjusted room and board costs jumped nearly 44 percent since the 1999-2000 academic year, according to the College Board survey.

Although the total price tag of attending college has increased, student aid helped mitigate the cost increase to a certain extent. The often-cited sticker price of attending public colleges -- including tuition, fees, room and board -- is $18,390. But with grants and tax credits (but not loans) factored in, the average net cost, what students really pay, stands at $12,620, according to the College Board. With the new American Opportunity Tax Credit and an injection of additional Pell Grant money, net costs briefly declined a few years back.

So while the sticker prices skyrocketed over the past 20 years, the net inflation-adjusted cost of attending college has also increased, but just not as much. The following chart shows total in-state sticker prices and net costs for tuition, fees, room and board for full-time undergraduates attending public, four-year institutions. (Years refer to the beginning of the academic year and costs are inflation-adjusted in 2013 dollars)

Of course, how much students pay hinges on what institutions spend. An American Institutes for Research report found real annual education spending per student increased 8.1 percent from 2000 to 2010 at public research universities. By comparison, it jumped 22.3 percent at private research universities – nearly three times as much.

Large, flagship state universities compete for top students by investing in programs and campus improvements, so their prices have jumped far more than those of two-year schools.

A few institutions established tuition guarantees, setting rates in stone for four years. But while this option adds predictability, most believe it doesn’t hold down costs.

The president’s plan calls for establishing a new system ranking the value schools offer, a move that could – in theory – pressure institutions to lower costs. Value would be measured by several metrics, including graduation rates and average student debt. Washington would also challenge states to tie more funding to performance.

A ratings system could do a lot to increase accountability, but it’s going to be an uphill battle to get schools’ support, said Jennifer Engle, the Institute for Higher Education Policy’s vice president for policy research. To push down costs, funds must be better aligned to assist the neediest students and colleges should focus on efficiency, streamlining operations where possible, Engle said.

Taking advantage of technology and online course offerings may eventually help colleges push down costs. So far, though, added infrastructure and IT staffing have only increased expenses, said Sandy Baum, a professor who authors the College Board’s price report.

Perhaps the biggest unknown in the cost equation is the extent to which prices influence students’ decisions on whether and where to attend college. Baum said students, particularly those from low-income families, are more price sensitive now than before the Great Recession hit.

There's no doubt that students are well aware of the rising cost of college. But at the same time, Baum says they must realize the cost still pales in comparison to the potential long-term financial benefits of a degree.

To illustrate just how fast college costs have climbed, refer to the following interactive chart. All dollar amounts are inflation-adjusted using CPI-U values for July of the corresponding year.